As January 2026 draws to a close, the U.S. dollar (USD) finds itself navigating a period of sustained weakness, compounded by a major leadership shift at the nation’s central bank. On Friday, the greenback was on track to record its second consecutive weekly loss—a significant reversal for a currency that had previously enjoyed relative dominance. While currency markets are often influenced by singular economic data points, the current decline is driven by heightening geopolitical friction, a re-evaluation of U.S. trade policy, and the official nomination of Kevin Warsh to lead the Federal Reserve.
Geopolitical strains
The primary catalyst for the dollar’s immediate weakness stems from escalating global tensions. Investors have turned cautious amid rumors and reports regarding a possible escalation in the Middle East. Historically, the dollar often acts as a “safe haven” during times of conflict; however, the nature of this specific tension has created a different market reaction.
The threat of conflict in a region critical to global energy supply has raised fears of a “stagflationary” shock—high oil prices coupled with slowing global growth. In this environment, the dollar’s status as a safe haven is being challenged by other traditional assets like gold and the Swiss franc. Furthermore, the market is pricing in the potential cost of another prolonged military engagement, which could strain the U.S. fiscal position and weaken the currency’s long-term appeal.
Trade policy and tariff effect
Parallel to the military rumors, the U.S. administration has intensified its trade rhetoric. Recent reports indicate the imposition of new tariffs on countries supplying oil to Cuba, alongside broader trade tensions with major partners like the European Union and South Korea.
While tariffs are often intended to protect domestic industries, their immediate impact on the currency market is frequently negative due to “policy uncertainty.” Markets loathe unpredictability. The threat of retaliatory tariffs from trade partners creates a “sell America” sentiment, as investors worry about the health of the global supply chain and the potential for a slowdown in U.S. export demand. According to recent market analysis from Saxo Bank, these tariff threats and fears of a government shutdown have contributed to a significant retreat from sovereign bonds and a persistently weaker dollar.
Fed factorÂ
The internal trajectory of the Federal Reserve is the most significant driver of the current volatility. On Friday, U.S. President Trump officially nominated Kevin Warsh as the next chair of the Federal Reserve, ending months of speculation. The move marks a potential “regime change” as Warsh prepares to succeed Jerome Powell in May.
The nomination has sent mixed signals through the market. While Warsh has a long-standing reputation as an inflation “hawk” who favors higher rates, his recent public alignment with the administration’s calls for rate cuts has introduced a layer of risk. Investors are now closely weighing whether Warsh will prioritize curbing inflation or succumb to political pressure for lower rates to offset the impact of the administration’s tariffs. This uncertainty has seen the U.S. Dollar Index (DXY) crack major support levels, with some analysts forecasting a decline toward four-year lows as the market questions the future of Fed independence.
Read more: Who is Kevin Warsh? Trump’s pick to lead the Fed
Performance against major peers
The dollar’s decline is most visible when compared to its major counterparts. The Euro (EUR) has capitalized on the dollar’s weakness, with the EUR/USD pair trending toward the 1.18–1.20 range. Meanwhile, the Japanese Yen (JPY) has seen a resurgence despite domestic economic challenges, as intervention fears and a narrowing yield gap between the U.S. and Japan draw capital back to the East.
Even the British Pound (GBP) has managed to post gains, bolstered by upbeat retail data and a sense that the U.K. may be more insulated from the specific trade disputes currently dogging the U.S.. Across Asia, the picture is more fragmented, but the general trend remains one of a retreating greenback, with the Australian dollar and Singapore dollar seeing marginal recoveries as investors diversify away from U.S.-denominated assets.
For more news on economy, click here.
